Sitton: RRC is getting ready for sunset review

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Oil prices might be down, but there’s no lack of news in the energy industry. Railroad Commissioner Ryan Sitton took time Friday to speak with the Reporter-Telegram about a wide range of topics affecting the industry and the commission.

The following is the first of three parts. Sitton shares his perspectives on the backlog of drilled uncompleted wells’ impact on production, the current gasoline glut and what would happen if the RRC would fail to be renewed under the upcoming Sunset Commission review.

Upcoming Q&As will cover Sitton’s insights on the Trans-Pecos pipeline, the opportunities that come with the growing demand for natural gas and whether he believes OPEC is at war with America’s oil industry.

MRT: Wood Mackenzie analysts recently said rig count as an indicator of production has been supplanted by the increased completions of drilled uncompleted wells (DUCs). What’s your perspective?

Sitton: We certainly know that the numbers are coming up, and it’s not surprising. If you signed yearlong drilling contracts but don’t want to sell your product at a market price that is not favorable, you either drill the well and get a basic completion — like an acidizing as opposed to a full hydraulic fracturing — or just shut the well in and wait until you’re ready to put that production online. We know that that’s happening and that there are a number of wells that could have an impact on production.

I will say this, though: If you were to look at a graph of the drilling rig count versus total production by the state and nation, they absolutely are going to continue to move together. When you realize that there is some differential in the proportional amount of rigs and they hold steady as production comes online, as you try to explain why that is, there are a number of factors. One of them is the drilled-but-uncompleted wells.

Some say we’re seeing oil production at such a disproportionately high level to the number of rigs — in other words, our rig count is below half of what it was a year ago — shouldn’t new production also be at half? The answer is no because the wells that people are drilling are going to be the most-prolific ones. They have to because of the economic environment. So, there’s other things that can explain that differential beyond just drilled-but-uncompleted wells, but they’re a factor, for sure.

MRT: What happens if the RRC fails to be renewed by the Sunset Commission?

Sitton: In the Legislature, just like any other bill, there’s going to be a sunset bill for the RRC. If they completely decided they were going to do away with the Railroad Commission, part of that bill would have to address what to do with the responsibilities the RRC has. Are you going to create a new agency? Are you going to break up its responsibilities among other agencies? They can’t just not continue the RRC; they would have to assign responsibilities out somewhere else.

MRT: Why does it seem the RRC is under sunset review every legislative session?

Sitton: It’s not up for review every session, and a lot of people are confused by this. Every state agency comes under sunset review every certain period of time, whether it’s eight years, 10 years, 12 years — whatever it is. When the Legislature puts those bills in, they identify when they want to review that agency again. The RRC, for example, came up for sunset review in (2013) and the session before that, so people assume the RRC is always up for review.

What happened is the RRC came up for review in the 2011 session after an eight- or 10-year break. The RRC commissioners and staff did not have a very good review session. The Legislature, feeling like, “Hey, you guys didn’t put your best foot forward,” said, “We’re going to give you a two-year pass, and you can come back in two years and do it again.” So, in 2013, the RRC came back under sunset review and didn’t do a very good job again. The Legislature said, “You know what? We’re going to give you a four-year pass because you did OK but not very well. In the 2017 session, you had better get it right.”

My expectation is that we’re going to do an exceptional job in engaging the Legislature and showing metrics for all of the things we do, showing all of the good things our staff does and really explaining our budgetary structures so that the Legislature can with confidence say, “Great! You’re doing what we need you to do,” and the RRC will get a 10-year period until your next sunset evaluations.

MRT: There has been record demand for gasoline but also record supply. What do you make of the gas glut?

Sitton: Picture, if you will, that the oil industry was overproducing by a pretty large chunk and that around the world there was about 2 million barrels a day too much about two years ago. It built up this big batch of oil that has made its way through the refineries. Refineries have increased capacity, they’ve run really efficiently and effectively. It’s taken about a year, but now all of that oil has been refined. The oil glut has moved through the process, and now it’s hit (gasoline) storage.

Demand has been high, but these guys refined a lot of products because margins were good. Margins are now much lower than they had been, so you’re hearing a lot of refiners now are reducing capacities or trying to find ways to reduce units back because their margins are pretty slim with all that excess refined product on the market.